INEQUALITY AND REVENUE ELASTICITY IN TAX REFORM
| Author | John P. Hutton,Peter J. Lambert |
| Date | 01 August 1983 |
| DOI | http://doi.org/10.1111/j.1467-9485.1983.tb01015.x |
| Published date | 01 August 1983 |
Scorfish
Joumlof
Polirical
Economy,
Vol.
30,
No.
3.
November
1983
0
1983
Smrtirh
Economic Socicly
INEQUALITY AND REVENUE
ELASTICITY
IN
TAX
REFORM
JOHN
P.
HUTTON
AND
PETER
J.
LAMBERT
University
oj
York
I
INTRODUCTION
Since the structure
of
the tax system has widespread implications for the
workings of the economy, and is the result of a series of piecemeal innovations
and reforms, the question of its redesign is always on the agenda. The public
finance literature does not, however, provide many practical guidelines to
officials seeking to evaluate the wider consequences of changes which are often
designed to achieve such relatively limited ends as “greater simplicity”,
“balance between earmarked and general taxes”, or “balance between income
and consumption taxes”.
A
natural constraint to place upon limited redesign
of the tax system is, however, that the distributional consequences be kept to a
minimum. Thus two recent studies, those of Creedy
(1982)
and Minarik
(1982)
for the
U.K.
and
U.S.
respectively, each evaluate alternative proposals for
revenue-neutral redesign by reference to measures of post-tax income
inequality. In this paper we explore a rather different approach
to
the problem.
The criterion we propose in choosing between alternative fiscal packages
yielding given aggregate revenue is that the package selected should not
change the revenue elasticity of the system. Our thesis is that elasticity-
neutrality will ensure, in an important sense, minimal distributional effect and
may be desirable for its own sake. We present some theoretical material in
support of this proposition, and apply it to the reforms evaluated in the studies
of Creedy and Minarik. The results give encouragement to the proposition
that control of revenue elasticity as well as of revenue itself, as a criterion for
fiscal reform, will in general be a useful and practical method
of
satisfying
distributional objectives.
In Creedy
(1982)
attention is drawn to some of the issues involved in
switching from the “unpopular”
U.K.
income tax to the less conspicuous
national insurance contribution as sources of revenue. In particular, Creedy
notes (i) that a revenue-neutral switch could be achieved by a smaller increase
in the national insurance contribution rate than the corresponding reduction
in the basic rate of income tax, and (ii) that this in turn would have the
consequence of increasing the dispersion
of
post-tax and post-contribution
incomes. (These results are intuitively clear- the base on which con-
tributions are levied
is
larger than the income tax base, and income tax is
recognised to be more redistributive.) Creedy proceeds by modelling the pre-
tax income distribution explicitly as lognormal, obtaining the consequences
of
Date
of
receipt
of
final manuscript:
2
March
1983.
22
1
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